Buffett’s $26 Billion Power Bet in West Seen Paying Off

Mark Sampson, vice president of system operations at PacifiCorp, interprets data from a graph at the Transmissions Grid Operations center in Portland, Oregon, U.S., on Tuesday, May 27, 2014. Photographer: Natalie Behring/Bloomberg

June 4 (Bloomberg) -- Warren Buffett’s $26 billion bet on
western U.S. power plants, transmission lines and wind farms is
poised to pay off.

The energy unit of Buffett’s Berkshire Hathaway Inc., with
the help of California’s grid operator, is moving to unite the
holdings under a single market capable of dispatching power
across seven states every five minutes. The system, designed to
handle sudden swings in supply and demand, would revolutionize
the markets from Oregon to Nevada, where 38 transmission
operators manually balance their territories on an hourly basis.

The move would be a game-changer for the renewables that
Berkshire Hathaway Energy Co. has accumulated over the past
decade, including two of the world’s largest solar farms, and
for other clean-power producers, according to those who trade in
the region’s markets. Berkshire’s plants stand to run for longer
periods of time, and its NV Energy Inc. and PacifiCorp utilities
will save as much as $63.9 million annually by 2017, Energy and
Environmental Economics Inc. reports show.

“It would be huge if all 38 balancing authorities
joined,” Sean Breiner, a market design analyst for San Ramon,
California-based energy trader Viasyn, said by telephone June 2.
“Instead of having these balkanized regions, you’d have
resources from Idaho to Wyoming all flowing into one kind of
large spot market.”

Green Power

Transmission operators across the U.S. are struggling to
manage record volumes of variable resources such as wind and
solar coming online to meet state renewables mandates. Power
prices, already weighed down by a 66 percent drop in natural gas
since July 2008, can slide to zero or negative at times when
output unexpectedly surges, pressuring profits for gas, nuclear
and coal generators.

Natural gas futures rose 1.1 cents, or 0.2 percent, to
settle at $4.64 per million British thermal units today on the
New York Mercantile Exchange.

California has a goal of securing 33 percent of power from
clean energy by 2020. By next year, the California Independent
System Operator Corp. expects renewables to meet almost a
quarter of demand. In the Northwest, renewables are nearly 7
percent of total supply, excluding hydropower.

Hourly Bids

The market, scheduled to start Oct. 1 pending approval from
the Federal Energy Regulatory Commission, would use hourly bids
from generators to match the cheapest resources with supply,
demand and transmission changes every five minutes. It would
initially include the territories of the California ISO and
PacifiCorp -- spanning 42,200 miles of transmission lines in six
states from California to Wyoming, extend to NV Energy’s Nevada
network a year later and could accommodate all operators in the
region.

Those who join would be trading in a “Model T for a
Ferrari,” Stefan Bird, senior vice president of PacifiCorp’s
commercial and trading operations, said in a May 27 interview at
one of the company’s wind farms in Washington. “A human, even a
really good one, can’t handle so many plants.”

Public power agencies have opposed a western-wide system
since the energy crisis a decade ago that left thousands without
power and caused prices to surge to record.

Their hesitation also stems from an age-old “fear” of the
FERC, Jon Wellinghoff, who joined the law firm Stoel Rives after
resigning as the longest-serving chairman of FERC last year,
said at a conference in San Francisco on May 29. “It will give
FERC some authority and power over their operations.”

Not Joining

Bonneville Power Administration, an agency that markets
hydropower for the federal government and operates transmission
ties between California and Oregon, has no intention of joining
and is involved in an effort to improve markets in the Northwest
alone, Doug Johnson, a BPA spokesman in Portland, said by
telephone May 28.

Iberdrola SA’s U.S. renewables unit would need BPA to join
the market or become its own balancing authority if it wants to
participate in the trades, said Laura Beane, director of market
structure for Iberdrola Renewables LLC, the second-largest wind
power developer in the U.S.

“Iberdrola is continually evaluating its option to ensure
it can optimize its asset portfolio,” Beane said by e-mail from
Portland. The market “can create efficiencies that will benefit
Iberdrola and its customers through lower integration costs for
renewable resources,” she said.

Separate Decisions

Bob Gravely, a spokesman for PacifiCorp in Portland, and
Shawn Elicegui, NV’s vice president of regulatory affairs in
Reno, Nevada, said their decisions to join the market were made
individually.

Berkshire’s acquisition of NV last year didn’t “seal the
deal,” Elicegui said by telephone May 29.

On a recent morning, PacifiCorp dispatcher David Landis’s
eyes darted between seven computer screens, a half-eaten meal
shoved aside, as he worked to balance fluctuations across the
utility’s six-state system. A screen at his desk in Portland
flashed wind forecasts.

“You can only put so much weight on them,” he said,
pointing to a chart showing wind output fell 150 megawatts below
forecast. “That’s enough to light a lot of Portland.”

The balancing system would take those fluctuations off
Landis’s hands so he could focus on more forward-looking
markets, Bird said.

Berkshire Investment

Berkshire Hathaway Energy’s spending in the western states
included $10.7 billion to acquire PacifiCorp and NV Energy, $8.7
billion in renewable investments, a $6 billion Northwest
transmission project and at least $568 million on the Lake Side
natural gas-fired power plant being completed this year in Utah,
according to company filings.

Class A shares of Berkshire Hathaway climbed today as much
as $940, or 0.5 percent, to $191,357. The stock has risen 7.2
percent this year.

Power generators and transmission operators in other parts
of the U.S. already participate in real-time markets run by grid
operators from the Northeast to Texas. California runs a five-minute market within its own territory. Should all the
authorities in the western U.S. join the new system, it would
become the nation’s largest geographically.

Cost Savings

Analyses prepared by San Francisco-based Energy and
Environmental Economics show the real-time market would save the
California ISO area as much as $74.3 million, PacifiCorp $54.4
million and NV $9.5 million in the year 2017.

More than half of Berkshire Hathaway Energy’s revenue is
generated from assets in the western U.S., its website shows.
The company is spending $5.2 billion to build the world’s two
largest solar farms in California.

To bring this growing collection of renewables onto the
grid, “you really need to have better tools -- situational
awareness, speed and wide areas of diversity,” PacifiCorp’s
Bird said. “The West lacks that, and this, from our point of
view, is critical.”